What Should Your Deposit Rates Be? Your Competition is a Poor Barometer

Could you use CostPro Suite- Deposit Pricing Tool more effectively?

Do you need an additional metric for Managing Interest Rate Risk?

Do you want to perform "What If" scenarios?

Are you peeking over the fence at your competition to set your Deposit Rates?


Related web seminar on this topic:

Deposit Pricing Tool

How to Price Your Deposit Rates

August 22 • 2018

11 am PT • 12 pm MT

1 pm CT • 2 pm ET



Boards and CEOs Feel Pressure to Raise Deposit Rates

With loan portfolios growing faster than deposits for many credit unions and the Fed promising rising rates into the foreseeable future, managers will be tempted to resort to emotion and the pressures of competition when it comes to raising their deposit rates. Wise management teams have already prepared and planned for rising rates by relying on an integrated cadre of empirical models to control Interest Rate Risk. But far too many boards and managers will resort to subjective, and inevitability, disastrous methods to determine what their rates should be on deposits (and loans). TCT Risk Solutions, LLC (TCT) has empirical deposit rate setting models that assure deposit rates are set to maximize profitability and minimize Interest Rate Risk.

Managers and Boards Need to Avoid Common Deposit Rate Setting Mistakes

For over 30 years, we at TCT have been studying the effects rising rates have on credit unions as well as how credit unions respond when rates do rise. Our findings point to some interesting conclusions:

· traditionally, in a rising rate environment, credit unions raise their deposit rates faster and at a higher level than necessary to maintain deposit bases sufficient to meet loan demand (which means they are not maximizing profitability);

· not all classes of deposits are rate sensitive (price elastic) to the same extent and this affects how different classes of deposits should be priced and shock tests administered;

· credit unions should increase rates on the most rate sensitive deposits first and only at the speed necessary to adhere to their Asset/Liability Management plans;

· credit unions should use a disciplined approach to deposit pricing utilizing stochastically-derived pricing tools (they should resist the temptation to price their deposits and loans primarily on how the competition prices theirs); and

· CEOs and boards have better control over deposit costs and rate shocks when they follow a well-designed A/LM policy.

Interest Margin is the Greatest Determiner of Profitable Operations

The greatest determiner of profitability in a financial institution is interest margin (subtracting the cost of funds from the interest earnings on loans and investments). This means, one of the most important duties a credit union board and CEO performs is making sure interest rates on loans and deposits are set to assure a healthy margin.

Pricing any Service According to the Competition is a Bad Strategy

Few financial institutions have the same goals, reserves and expenses as their competitors. Yet, far too many credit unions set their rates and prices according to their competitors. Pricing any service according to the competition will almost always get any credit union into trouble. If you are setting your deposit rates according to your competitors – you are not managing your interest margin effectively.

TCT Has a Better Solution for Setting Rates than Watching Competitors

Sadly, we at TCT Risk Solutions, LLC (TCT) have observed that when credit unions set their rates (deposit or loan) by watching the competition, unacceptable loan-to-deposit ratios and poor profit margins follow. Instead of looking to the outside to set rates, credit unions should be looking within their own balance sheet and using empirical, statistically derived methods.

There are Many Benefits to Using TCT to set Deposit Rates

TCT’s empirically derived deposit pricing tools provides these benefits:

· improved profitability

· control over deposit interest expenses

· an objective, non-emotional method for setting rates on each class of deposits

· an additional metric for managing Interest Rate Risk

· establishes deposit rates according to a credit union’s financial health

· can be used to project cost of funds and perform “what if” scenarios

· continual readjustment as a credit union’s balance sheet and plans change